Estate Planning Blog

Special Needs Trust

Special needs trusts, or supplemental needs trusts, are a unique form of planning for a disabled individual. These trusts recognize the unique challenges facing disabled persons and the delicate interplay with government assistance programs designed to help provide for them. These trusts are designed to supplement such programs, providing additional resources for the care and comfort of the permanently disabled, while simultaneously preserving the beneficiary’s eligibility for government assistance.

Many disabled individuals are unable to support themselves through traditional employment and rely heavily on government assistance to maintain their quality of life. To qualify for such benefits, those individuals must not have assets above a certain threshold. Currently, a single applicant for Supplemental Security Income or Medicaid must not have more than $2,000 in countable assets. With such a low ceiling on assets, it’s easy to see how a modest gift or inheritance to a disabled individual could wind up disqualifying him or her from eligibility for government assistance programs. It is for this reason special needs trusts are often utilized to preserve the beneficiary’s eligibility for such programs.

Special needs trusts are able to provide benefits for disabled individuals while simultaneously preserving eligibility for government assistance programs due to the mechanics of such trusts.  In such a trust, assets are placed in the trust for the benefit of a beneficiary, but legal title to those assets is held by a trustee. Trust assets are not treated as countable assets for purposes of SSI or Medicaid because the beneficiary does not actually own them.  However, in order to keep the beneficiary eligible for benefits, distributions from the trust should never be made to the beneficiary directly; instead, distributions should be made to the provider of goods and/or services.  In addition, distributions from the trust should supplement the benefits the beneficiary receives and should not be in place of said benefits.

Special needs trusts also allow individuals to bypass Medicaid transfer penalties. Federal law imposes a penalty on individuals who transfer assets with an intent to fall below the monetary threshold that would qualify him or her for Medicaid eligibility. This is a particularly harsh penalty, rendering the individual ineligible for Medicaid for a monthly duration equivalent to the amount of value of the assets transferred divided by the average monthly costs of care in the individual’s state of residence. For example, if the average monthly cost of care in the individual’s state were $5,000 and that individual transferred away assets with a value of $50,000, the transfer penalty would be a duration of ineligibility for ten months. Disabled individuals who transfer funds into a special needs trust are exempt from this penalty, so long as said individual adheres to all requirements in the creation and funding of such trust. Funds that others transfer into a special needs trust for a third party beneficiary are also exempt from this penalty. 

There is one major caveat to these trusts, however. Under the terms of 42 U.S.C. sec. 1396p(d)(4)(a) (“d4A”), special needs trusts that are created with the beneficiary’s own assets – first party special needs trusts – are required, upon the death of the beneficiary, to pay the remainder of the trust assets to the state and/or federal government, up to the amount of the total medical assistance paid on behalf of that individual. Other restrictions apply to first-party special needs trusts: the disabled individual must be under the age of 65 at the time the trust is created and funded; the trust must be created by a parent, grandparent, guardian or a court; and the assets must be used for the sole benefit of the disabled beneficiary. There must be language in the trust document that shows the intent on the part of the creator to supplement, rather than supplant, government benefits; prohibits the trustee from making any distributions that would in any way reduce the beneficiary’s eligibility for government benefits; and denies the disabled individual the authority to distribute trust assets. Trusts established under d4A are trusts for assets, rather than income, so any income received will have to wait a month before being deposited in the trust. d4A trusts must also be irrevocable.

There is no such limitation on special needs trusts created by third parties with third party funds; provided, however, that the trustee has sole discretion over distribution to the beneficiary and the beneficiary cannot demand distribution.

The limitation on who may create a d4A trust may change if Congress passes and the President signs Senate Bill 349, the Special Needs Trust Fairness Act of 2015. This legislation would allow disabled individuals to set up their own special needs trusts without the assistance of the individuals or court currently required to do so. As of this writing, the measure has passed the Senate and is awaiting consideration in the House.

Federal law also allows for pooled special needs trusts.  These trusts, established under 42 U.S.C. sec. 1396p(d)(4)(c), are operated by nonprofit organizations. Each participating beneficiary receives a “sub-trust.” These pooled trusts do not have the same requirements as first-party special needs trusts. Medicaid applicants, the court, or the applicant’s parents, grandparents or guardian can set up a sub-account in a pooled trust. Similar to a first-party special needs trust, upon the beneficiary’s death, the remainder of the sub-account must be used to repay the state and/or federal government for any expenses paid on behalf of the beneficiary. Any assets remaining after said repayment are distributed between the nonprofit that manages the pooled trust and a beneficiary designated by the trust.

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This article does not constitute legal advice.